Monetary Convergence and Risk Premiums in the EU Accession Countries
Lucjan T. Orlowski
Sacred Heart University - John F. Welch College of Business
Open Economies Review, Vol. 14, No. 3, pp. 251-267, Kluwer Academic Publishers, July 2003
This study examines the impact of various monetary policy regimes on the ability to lower inflation and exchange rate risk premiums in the EU accession countries as they undergo monetary convergence to the eurozone. It proposes a monetary policy framework of flexible targeting of relative inflation risk premium that is believed to be credible and useful for managing these two categories of risk. A model of inflation and exchange rate risk premiums within the context of inflation targeting is developed. Recent trends in these risk premiums in Hungary, the Czech Republic and Poland are tested by employing the threshold ARCH (TARCH) model.
Keywords: inflation risk premium, exchange rate risk premium, inflation targeting, monetary convergence, transition economies
JEL Classification: E42, E52, F36, P24
Date posted: February 9, 2005
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